How to maintain accurate inventory is a major challenge for all retailers, regardless of their SKU quantity. The number of stocks in your warehouse must line up with the quantity you’ve recorded electronically to run your retail store efficiently. If not, poor inventory accuracy can lead to stockouts and order fulfillment errors. You wouldn’t want to frustrate your customers because the product you promised them is now out of stock. This article will discuss everything you need to know about accurate stock: why it is essential, how to calculate it, and the best practices to improve your accuracy rate.
What is inventory accuracy?
Inventory accuracy measures the difference in stock between your electronic records and your physical stock. Usually, you compare the recorded inventory number in your inventory management system and what is actually available in your warehouse or store.
For example, if you record 100 items in your software but count only 80 units in your stockroom, your inventory accuracy is 80%.
Why do you need an accurate inventory?
Inventory accuracy is a crucial metric for retail businesses. If managed well, it can control inventory quality by preventing stockout, shortages, and shrinkage, and also deliver a positive customer experience.
Let’s explore its benefits for your company:
Provide a better understanding of your business
Accurate stock status gives you a deeper knowledge of what and how many products you need on hand to meet customer demands. This helps you avoid overstocking or understocking. With the correct number of product availability, you can make sure your customers can place and receive orders accordingly. There will be less worry of shortages or hanging too many dead stocks on shelves.
Save time and money
Inventory accuracy helps you minimize the time for counting and looking for products. When your inventory is tracked correctly, including what has been ordered and what is left in stock, you will need less inventory recount. An inventory management software can update the stock in real time and shows you exactly what you currently have without checking it manually.
In addition, accurate inventory informs you of the products that are selling well and not. Hence, you can decide to stop restocking the slow-selling items and push sales for the remaining. It helps you save valuable space in your warehouse and reduce inventory carrying costs. Moreover, knowing the best-selling products gives you insights into a further plan to stock or manufacture these items.
Boost efficiency and productivity
Having accurate inventory allows your employees to do their work easier and faster. Thanks to barcode scanners and an inventory management system, they know exactly where to find a product in the warehouse. Your staff can scan the item’s barcode when picking it rather than having to write it down manually. This speeds up their job and makes the process more efficient. By reducing manual work, you also minimize human errors and allocate your personnel to focus on more important tasks.
Improve customer experience and loyalty
Inventory accuracy can contribute to your customer satisfaction and loyalty. If you can display the correct product availability, customers won’t order out-of-stock items, for example. The order fulfillment process will go smoother as well with faster shipping. This leaves a good impression on customers and increases repeat purchases. On the contrary, inaccurate inventory can lead to unfulfilled orders or missed sale opportunities if the customers don’t know you still have the product they want.
How to measure inventory accuracy?
Here is the percent accuracy formula to calculate for your stock:
Inventory accuracy = (counted items / items on record) * 100
Start by counting the units of an SKU you have in stock. Then, divide that number by the figure recorded in your inventory management system of that same SKU, and multiply by 100.
For instance, you’ve counted 1,000 units in your warehouse. Your electronic records show you have 1,200. That means your stock accuracy rate is: (1000/1200)*100 = 83.33%.
Keep in mind that the formula is only correct if you have a reliable stock count. There are 2 methods for stock counting to give you inputs for calculation: a physical inventory count or inventory valuation.
Physical inventory counting
A physical inventory count refers to the manual counting of your stock. To avoid human errors, you should have 2 separate teams to count each SKU and compare their results. Divide your warehouse into designated zones. Each team will take turns counting the stock located in that zone only. If the 2 teams come up with the same number, record it. If not, do a recount until they meet a consensus.
Physical inventory counting works best for brands with fewer SKUs, since large volumes of inventory will take considerably longer to tally.
Inventory valuation
Another approach to measuring inventory accuracy is using inventory valuation. It is the monetary value of your unsold inventory at the time of reporting.
For this method, you take the value of your actual inventory. You can use barcode scanners to quickly add up the value of the available stock. Then, divide it by the inventory value displayed in your inventory management system, and you’ll have the same result.
Continue with the same example, if you count 1,000 units in a warehouse with $5 value for each, your total inventory is worth $5,000. Your inventory management system records 1,200 units, meaning $6,000 value. Taking the division, your inventory accuracy rate is (5,000/6,000)*100 = 83.33%.
The inventory valuation method is most useful for big businesses with large inventory volumes. As they cannot use manual counting which is less practical or time-consuming for huge warehouses.
4 factors impacting accurate inventory
Stock discrepancies can cause many problems for your supply chain. Your website may show the wrong status of product availability, and customers may order a product that doesn’t exist in your stock.
Before getting into the solutions, you should know the factors that trigger these inaccuracies in the first place.
Undocumented inventory loss
Inventory loss, or inventory shrinkage, happens when there are fewer products in stock than in the recorded balance. There are many reasons for this, such as theft and accounting errors, or damages during delivery.
If you have a damaged item that can’t be sold, exclude it from your physical count and write it off in your software. Otherwise, if these losses are not documented, your physical count won’t align with your recorded stock.
The best way to avoid this type of discrepancy is by documenting the losses immediately as they occur. Hence, you can keep track of your stock and seek solutions for these losses.
Errors with order fulfillment from suppliers
When you make a purchase order (PO) from your vendor, any mistakes that arise during the fulfillment can cause inaccuracy for your inventory. For example, you may record your inventory before receiving the shipment. If there is a delay from the supplier, your customers cannot get the products on time, and you’re left to fix these costly errors.
Therefore, you should work with reputable suppliers that you can trust to take responsibility for their missteps. In addition, you can request an email for fulfillment confirmation to double-check for any errors before the vendor ships your PO out.
Disorganized warehouses
Many warehouses share the same problem of disorganization. When you have a large number of items, it’s easier to misplace them without an inventory management system for storage. A disorganized warehouse causes products to be lost or not tracked properly.
If an item is put in the wrong place or has incorrect labeling, it will create an inconsistency between your physical counts and your inventory records. This costs you sales because the products that cannot be found will sit on shelves and become obsolete.
Therefore, it’s crucial to organize your warehouses and pick locations. Arrange uniform bins and pallets, and set up an inventory labeling standard for your pickers and counting teams to follow.
Mismanaged returns
Another challenge that creates inaccurate inventory is mismanaged returns. Returned goods may be coded incorrectly and cause false inventory records when it is restored in your warehouse. For example, a damaged product is wrongly marked as “available” and becomes a “ghost inventory”. It means your inventory system shows a specific good is available while it’s not.
To tackle mismanaged returns, you should apply a smoother return process, and automate tasks where possible to reduce human errors in your inventory records. Moreover, train your employees to handle returns properly: apply the correct codes before putting items back in stock.
What is a good inventory accuracy rate?
Research from Auburn University RFID Lab reveals that the average inventory accuracy for U.S. retailers is 65%. It means over a third of the time, an average retailer doesn’t know where a certain product is, or whether it is in stock.
However, 65% is not a good benchmark. The optimal rate is 100%, which leaves plenty of room for improvement. Getting closer to that figure, you’ll cut down the wasted time reconciling your stocktaking counts with your inventory records.
Normally, the more sales you make, the higher likelihood of stock discrepancies. Thus, to run your store efficiently, you must devise methods that control inventory accurately, especially important as your business grows.
5 inventory accuracy best practices
Now that you know the inventory accuracy metric, its importance and challenges, let’s explore how to improve inventory accuracy for your brand.
1. Invest in an inventory management system
A high-tech inventory management system has automation and many features to ensure your inventory is recorded accurately:
- Facilitate physical inventory counting with barcode scanning: Barcode helps you track items among thousands of SKUs. You can create barcode labels with customized attributes, manage your barcode listing in one view, and get product information via scanning barcode. This helps your staff sort out, find locations, and count products more easily.
- Real-time visibility into your inventory transfer: Together with product labels, the movement of stock can be updated in real time once it is scanned. You can know exactly where your products are across all stages of your supply chain. Hence, you can track SKUs throughout the product life cycle, whether it is just delivered from a supplier, placed into a warehouse, moved to a store, or sold. This visibility lets track your inventory down to each unit, thus ensuring your inventory is always accurate.
- A reliable inventory management system will help you scale sustainably. Make sure your software can handle a large scope of business with more advanced features if you want to expand. Otherwise, you should look for a better, more connected inventory management system or ERP system.
2. Standardize bins and pallet sizes for storage
As mentioned above, an organized warehouse is a vital factor that impacts your stock accuracy. Standardized bins and pallets are the foremost elements of a well-arranged warehouse. With standard dimensions, you can streamline your warehouse workflows with an efficient inventory movement process.
Furthermore, optimizing warehouse storage also helps you record inventory more accurately. When your products are arranged in standard bins or pallets, it is much easier to sort, count, and track these items. Therefore, your reporting is also more accurate and aligned with your inventory records.
3. Work with a fulfillment partner
Instead of storing your own inventory, you can partner with a 3PL company to take care of warehousing and order fulfillment activities. The fulfillment company can store your inventory in their warehouse and manage it for you. They also handle picking, packing, and shipping products to your customers.
Thanks to their complete stock management system, a 3PL can save you more time and resources than you do it yourself. By outsourcing logistics to professionals, you can focus on other tasks to grow your business.
4. Implement cycle counting
Cycle counting is a perpetual auditing procedure for inventory where you count a small portion of stock every day. Your entire inventory will be counted on a rotating basis.
By adopting a cycle counting program, you can enjoy a higher accuracy rate. This way, any errors discovered during these small counts will help you narrow down where to check for discrepancies. Thus, you can quickly catch and resolve issues immediately to adjust your inventory records accordingly.
5. Perform regular inventory audits
Inventory audits compare your physical stock levels to your current financial records to confirm the correctness of your accounting. If you have a large volume of inventory, you can hire a 3rd-party auditor.
Unlike cycle counting which happens continuously and in real time, periodic audits occur at specified times, such as monthly, quarterly, or annually. The more often you conduct an audit, the more accuracy you’ll enjoy. Regular audits help identify stock shrinkage such as lost or damaged items before it causes problems.
The bottom lines
Accurate stock is crucial to streamlining your inventory management process. It helps you prevent stockouts and overstocking, and reduce operational costs. We hope the 5 best practices for inventory accuracy have given you the right knowledge to boost your inventory management workflows. A highly accurate inventory will inform you with better demand forecasting and contribute to greater customer satisfaction.
